When you were watching the Super Bowl on your satellite dish Sunday, did you stop and think who was responsible for providing that wonderful HD picture on your LCD screen? I didn't think so. However, if it weren't for Harmonic (Nasdaq:HLIT) and companies like it, you'd be watching a far less attractive picture. Don't think so? Here's what Hanno Basse, DIRECTV's (Nasdaq:DTV) Vice-President, Broadcast Systems Engineering, had to say a few months ago about Harmonic technology, "The technical merits of Harmonic's Electra 7000 encoders and IP-based video processing technologies are outstanding and continue to help us deliver a superior HD experience to our customers." DIRECTV is the world's largest direct-to-home satellite operator and I think they know a thing or two about video display.

Earnings Seem to be Holding
Last week, Harmonic announced earnings per share (EPS) of 20 cents for the fourth quarter which beat analyst expectations of 17 cents by 3 cents. It seems the fourth quarter and year-end results were solid, if not extraordinary. Q4 sales were up 11% to $96.9 million from $87.4 million with full-year revenues up 17% to $365 million from $311.2 million. Both its domestic and international markets were strong in 2008 with international revenues contributing 47% of the total in the fourth quarter; demonstrating management has built a well-balanced business model.

Other highlights include gross margins improvements, GAAP EPS for the entire year of 67 cents, up from 28 cents in 2007, $327.2 million in cash and short-term investments, up from $293.4 million at the end of the third quarter and the purchase of Israel-based Scopus Video Network (Nasdaq:SCOP) for $51 million in cash. Management believes 2009 is an opportunity to continue expanding its customer base and grow its global market share. The Scopus acquisition will certainly help. (Companies can manipulate their numbers; learn how to determine the accuracy of EPS in How To Evaluate The Quality Of EPS.)

Analysts Not So Sure
There are 10 analysts covering its stock. Their estimate, according to Thomson Financial Networks, for full-year earnings in 2009 is 53 cents per share, down from the 70 cents a share non-GAAP result in 2008. In 2010, they see a further decline of 4-49 cents a share with sales essentially remaining flat over the next two years. Harmonic stock hasn't been this low since the middle of 2006 and is down 52% in the past year alone. With cash per share of $3.44, it costs investors $1.71 per share to buy 53 cents in annual earnings in 2009. That's just 3.2 times EPS and no debt to worry about. That's my kind of company.

At least one analyst covering the stock feels there's an opportunity here. Blair King of Avondale Partners believes most of the telecommunication equipment stocks are cheap right now, with prices as low as they were back in 2000-2001, when business was extremely difficult for equipment manufacturers. While one can never be certain, it appears the bottom is near. Companies like Harmonic should benefit from the future trend towards HD.

Bottom Line
I believe analyst estimates for all companies right now are erring on the conservative side and it's clear predicting an end date for this recession is next to impossible. I wouldn't bet the family fortune that 2010 EPS are higher than 49 cents, but I would bet the home theatre.

Learn more in Four Tips For Buying Stocks In A Recession.



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Tickers in this Article: HLIT, DTV, SCOP

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